A new version of one of the world’s biggest exchange traded funds will manage holdings adhering to environmental, social and governance criteria. One feature will be lower weights for some technology titans including Tesla, Facebook and Amazon.
The $200bn QQQ ETF, which tracks the Nasdaq-100 stock index, is the second most actively traded exchange traded fund. On Wednesday the fund manager Invesco launched ESG versions for investors in the US and Europe, based on a new form of the index created by Nasdaq in June.
Some of the new weightings may come as a surprise, as many tech groups typically score high on ESG measures. Yet the likes of Amazon, Google, Tesla and Facebook have lower ESG-weighted rankings than their current Nasdaq-100 weights based on market capitalisation.
The new weights gauge how effectively companies are managing their ESG risks, and are based on data collected by Sustainalytics, a unit of Morningstar. The electric car pioneer Tesla’s “management of human capital and product governance risks reveals significant shortcomings”, said Sustainalytics.
Meanwhile, the tech groups Microsoft, Apple and Nvidia will become more dominant members in the ESG version of the Nasdaq-100 index and the Invesco ETF.
“The management of ESG issues is part of the ratings process,” said Lauren Dillard, head of investment intelligence at Nasdaq.
Six companies that comprise the Nasdaq-100 are not present in the ESG version of the index due to a methodology that excludes companies deriving revenues from sources that include military weapons, nuclear power, oil and gas and thermal coal.
Among the excluded companies are Exelon, American Electric Power and Xcel Energy, all utilities, as they derive more than 4.9 per cent of their annual revenue from electricity generated by nuclear or coal plants, according to the index methodology.
Removing these companies “improved the already low ESG risk rating [of the Nasdaq-100] by 10 per cent”, Invesco said.
“We’re seeing a growing number of ESG alternatives to popular index-based strategies, and these provide investors and advisers with an alternative,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research.
Investors have increasingly focused on ESG funds in the past two years, rewarding fund providers such as BlackRock and Invesco. Passively-managed ETFs with a primary ESG mandate had received $24bn for the year to October 22, after a record inflow of $27.5bn during 2020, according to FactSet.
While some holders of the QQQ may seek to own the ESG-tinted ETF, Anna Paglia, global head of ETFs and indexed strategies at Invesco, said the investment manager anticipated that it “will attract a new segment of the investor population”.
